Money Smarts Blog

Buy now, pay later plans: too good to be true?

Mar 25, 2022 || Kerri Wells, Card Portfolio Product Manager

hand holding money

Originally published on March 29, 2021

Full disclosure, we’re not endorsing any of these services below, but want you to be aware of what’s out there. Whatever you decide, make sure you read the terms and conditions, and understand the penalties before you move forward. Still unsure? Schedule a financial health check-up with us, and we’ll figure it out together.

Installment or "Buy now, pay later (BNPL)" plans aren’t new. Throwing it back to when Kmart was the king of layaway (the ability to buy goods and pay for them over several weeks) during the holidays. Next to the “Blue Light Special” it gave a lot of shoppers the means to afford gifts at the holidays

Fast forward to 2022, and companies such as Affirm, AfterPay, Klarna, PayPal, Quad Pay and others offer this buy-now, pay-later system by giving you micro installment loans (yes, loans). Several big card issuers have already launched their own versions of BNPL, too.

And people are noticing. Between March 2020 and June 2021, the consumer user base for BNPL grew a whopping 85%, according to PYMNTS.com.

Let's talk about how these services work and the pros and cons.

What are installment services?

Mini installment plans act like microloans for everyday purchases, like clothes, makeup, electronics, and gym equipment. Affirm, for example, also supports unexpected purchases, like car repairs.

But unlike car or home loans, which you typically pay off over the course of many years, products and services financed through these services are typically paid off in a few weeks or months. Generally, these services are interest-free, but if you miss a payment, you’ll be hit with finance charges or late fees (for example, AfterPay charges an initial $10 late fee, and a further $7 if the payment remains unpaid 7 days after the due date).

But how do they work?

Each online installment plan offers different setups, but in general: you buy your item now by selecting the plan at checkout (with a qualifying retailer), creating an account and completing your purchase. You'll usually pay the first installment and the next one will come out about two weeks later. Otherwise, the product or service will arrive on time, just like it would if you paid in full at checkout.

Pro-tip: To take advantage of these interest-free installment plans, the retailer you're shopping with needs to support them. Keep an eye out for the installment service's logo when you're viewing a product. This lets you know the partnership exists and you can select a payment plan at checkout. 

Should I use these services?

Again, read the terms and conditions before signing up. It’s also good to weigh the pros and cons:

Pros

You can make a plan to pay over time to help you budget.
If you have things you need or want to buy, you're not obligated to pay for it, in full, at checkout.

You don't need great credit to use it.
Most services do a soft credit check, which won't hurt your credit score.

It's simpler than a loan or credit card.
If you've had trouble with credit cards or don't like using them, this is an easier method than applying for a credit card or personal loan.

Cons

You aren’t actually spending less.
If you really want that $400 TV, seeing payments broken up into $100 every other week tricks you into believing you're paying less for an item. In reality, you're still paying the same amount and you're borrowing money to do it.

Not only are you spending the same amount on that particular item, nearly one-third of BNPL users reported an increase in spending overall with the service according to the Financial Health Network. So if you find you're overspending your budget and taking on additional debt, even at 0% interest, it could still have a negative impact on savings, borrowing, and, ultimately, your financial health.

You might not get approved for the full amount.
Even if you don't have a strong credit history, it's still a factor in determining if you're eligible for the full amount requested. There's a chance you might not get approved for the full amount you're requesting. 

Not all purchases are eligible.
Even if the retailer is a partner, not all purchases qualify. For instance, AfterPay has a $35 minimum installment payment, so if your order equals less than that, it's not eligible.

It's still a loan.
Consumers need to understand that BNPL financing is still a debt that needs to be repaid as agreed, the same as their credit cards and other revolving or installment loans.

Installment plan services are one way to finance large purchases over a short period of time, if you choose a structure that works with your spending habits. Although IHMVCU doesn’t offer online installment plans, you can use your IHMVCU debit or credit card to complete your purchases.

Pro-tip: With the IHMVCU Rewards Card, you'll earn 1% cashback each time you make a payment with these services.

Just remember, online installment plans are still a loan, and you're still on the hook for paying your bill in full. If you don't think you'll be able to afford payments, you may want to consider another payment method or wait until you have cash on hand to make your purchase.

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